Question

Rusty Corporation purchased a rust-inhibiting machine by paying $53,500 cash on the purchase date and agreed to pay $10,700 every three months during the next two years. The first payment is due three months after the purchase date. Rusty's incremental borrowing rate is 12%. The machine reported on the balance sheet as of the purchase date is closest to: (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided.) $75,111. $85,600. $139,100. $128,611.

Answer 1

$128,611.

Working:

Value of Machine will be the present value of all payment made.

a.

Present Value of quarterly payment

=

Quanrterly Payment x Present Value of annuity of $ 1

=

$           10,700

x

7.020

=

$           75,111

b.

Present Value of annuity of $ 1

=

(1-(1+i)^-n)/i

Where,

=

(1-(1+0.03)^-8)/0.03

i

12%/4

=

0.03

=

7.020

n

2*4

=

8

c.

Value of Machine as of Purchase date

=

Cash payment + Present Value of Quarterly payment

=

$           53,500

+

$       75,111

=

$       1,28,611